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Centralized vs Decentralized Crypto Currency Exchanges

Dec 14, 22  |  Bakhtain Afzal

Even if you aren’t in the tech industry, there are high chances you know about what cryptocurrency is. But, that’s not it, there’s a lot more to know, and centralized and decentralized exchanges are one of them. 

Centralized and decentralized exchanges are the two primary categories of cryptocurrency trading platforms. Before you start trading on any of centralized or decentralized platforms, you need to have a solid understanding of what these exchanges offer. This article presents a comprehensive analysis of decentralized exchange vs centralized exchange. Moreover, we’ll be answering most of your questions about are crypto exchanges safe.

What Is Meant by Cryptocurrency Exchanges?

Most people simply head towards a reliable crypto exchange as soon as they decide to  trade their digital assets. Here’s what these crypto exchanges mean. 

To put it simply, cryptocurrency exchanges are third-party businesses that enable buying and selling of various cryptocurrencies for other crypto assets, fiat currencies, and digital currencies. And, there are two different types of crypto exchanges, centralized and decentralized crypto exchanges. 

What Are Centralized Cryptocurrency Exchanges?

Before reading about centralized vs decentralized crypto exchanges, let’s first discuss the types of crypto exchanges. This is first of the types of crypto exchanges. Centralized cryptocurrency exchanges function as the middle ground for buyers and sellers, profiting off of transaction fees and commissions. A cryptocurrency exchange (CEX) might be considered equivalent to a stock market, except that it deals only in digital assets. Binance, Coinbase, Kraken, and KuCoin are some of the most well-known cryptocurrency exchanges. These exchanges function similarly to stock trading websites or apps in that users buy and sell digital assets at the current market price (known as "spot") or set a price at which they want their orders to be filled (known as "limit orders").

All orders to buy or sell are recorded in an order book and sorted according to the desired purchase or sale price on a commodity exchange. Once the desired lot size and best executable price are entered, the exchange's matching engine will pair up interested buyers and sellers. Thus, the supply and demand for one digital asset relative to another will determine its price.

What Are Decentralized Crypto Exchanges?

In contrast to centralized exchanges, which need a third party to process your transaction, decentralized exchanges enable you to send and receive funds directly from your digital wallet. A few examples of decentralized crypto exchanges are Uniswap, PancakeSwap, dYdX, and Kyber.

Smart contracts, blocks of code on a distributed ledger that run autonomously, are the backbone of these decentralized markets. Compared to a centralized cryptocurrency exchange, smart contracts improve privacy and reduce slippage (another name for transaction fees).

However, due to the absence of a trusted third party, users of decentralized crypto exchanges are expected to be experienced traders, despite the fact that smart contracts are “rules-based”.


What Is the Difference Between DEX and CEX? Decentralized Exchange vs Centralized Exchange

Here are the main differences that contribute to different types of crypto exchanges, decentralized exchange vs centralized exchange: 

Security 

When comparing centralized and decentralized exchanges, security continues to be one of the most important determining factors. Decentralized exchanges have shown to be safer than centralized exchange systems, which comply with severe security rules. 

This is due to the fact that users of decentralized exchanges are not required to transfer money into intermediary accounts, which are prime targets for hackers. When utilizing a self-custody wallet, a crypto trader retains complete control over his funds as well as any transactions involving those funds.

Prevalence

Decentralized cryptocurrency exchanges (DEXs) are quickly gaining traction among crypto traders and are having a significant influence on the cryptocurrency exchange industry. 

This is despite the fact that centralized crypto exchanges have a larger user base as a result of their earlier market introduction.

Control

This is another important contributing factor to centralized vs decentralized crypto exchanges. With peer-to-peer networks, customers of decentralized exchanges have complete authority over their own funds. This gives them more freedom compared to centralized exchanges. Decentralized crypto exchanges have gained popularity because centralized exchanges let platforms exert more control over their users. And, most cryptocurrency traders want decentralized trading environments.

Transaction Fees

There are no transaction fees on a top decentralized exchange since there are no middlemen. However, this feature is available on centralized exchanges for making use of the third-party exchange services they provide. Since there are no middlemen involved, the fees associated with transactions carried out through decentralized cryptocurrency exchanges are far lower than those associated with those carried out through centralized platforms.

The level of ease and protection offered by an exchange will determine whether a user opts for a centralized or decentralized platform to trade their cryptocurrency. A decentralized exchange, also known as a DEX, is an excellent choice for traders who seek lower transaction fees and greater control over their own funds.

Advantages of Decentralized Crypto Exchanges

Now that you know about Decentralized exchange vs centralized exchange, here are the advantages of centralized cryptocurrency exchanges that you shoul read about before selecting the top decentralized exchange:

Ownership 

Users' assets are not moved to a new entity in a decentralized exchange. As a result, neither the firm nor the organization needs to worry about being hacked, and the users can sit back knowing there are less threats like fraud, theft, and failure.

Fewer Chances of False Trading

Decentralized crypto exchanges make it possible for users to trade cryptocurrencies with one another directly. By doing away with the need for an intermediary, decentralized exchanges remove the risk of fraudulent trading and wash trading.

Reduces the Prevalence of Censorship

Since users of decentralized exchanges are not required to complete out know-your-customer (KYC) forms in order to conduct transactions, they are free to conceal their identities during this process. Since DEXs do not impose censorship, a greater number of cryptocurrencies and digital assets are able to be traded on them than can be done on CEXs. It is essential to keep in mind that DEXs are the only marketplaces where a variety of alternative cryptocurrencies can be traded.

Disadvantages of Decentralized Exchanges

After reading about centralized vs decentralized crypto exchanges, here are the disadvantages of DEXs.

Complex Procedures

Users of decentralized exchanges are responsible for protecting their private keys and the passwords that access their digital cryptocurrency wallets. In contrast to centralized exchanges, which offer a more straightforward and user-friendly experience, a top decentralized exchange require the user to invest time and effort in order to learn and become familiar with the platform and the process. Centralized exchanges offer an easier and more user-friendly experience.

Less Currency Payment Methods

If you're trying to purchase or sell digital assets using fiat money (also known as "on-ramping" or "off-ramping"), you may want to explore elsewhere than a DEX. For consumers who don't have crypto on hand, this reduces their utility.

Low Liquidity

Over 99 percent of all crypto deals are processed through centralized exchanges, which suggests that these exchanges are responsible for the majority of trading activity. Since the volume of trades on decentralized exchanges is typically minimal, it can be difficult to discover parties interested in buying and selling.

Advantages of Centralized Cryptocurrency Exchanges

Accessibility 

Trading and investing in cryptocurrencies can be made simple and approachable for novices through the use of centralized exchanges. Centralized cryptocurrency exchanges offer users a less complicated alternative to the complexities of cryptocurrency wallets and peer-to-peer transactions by enabling users to access their accounts online through a variety of applications and websites. This provides users with a simpler means of transacting with one another.

Secure

Centralized exchanges provide an additional layer of security for trading and transactions. Centralized exchanges offer extra peace of mind by mediating the deal on a standardized network.

Higher Chances of Earning Profits

Margin trading, in which you borrow money from the exchange to invest with more clout, is a feature of some CEXs. It raises the potential for profit for investors but also magnifies the severity of any losses.

Disadvantages of Centralized Cryptocurrency Exchanges

Higher Chances of Hacking

Companies running centralized exchanges are liable for their consumers' assets. Hackers and thieves often target large exchanges because they have Bitcoin worth billions of dollars.

Transaction Fees

In contrast to peer-to-peer transactions, centralized exchanges typically levy substantial transaction fees for their services and convenience, which can become prohibitive when dealing in large sums.

Higher Risk of Fraud

Last but not least, most CEXs will not let you store your private keys on your digital wallet, opting to act as a custodian for your digital asset in their own digital wallet. A centralized cryptocurrency exchange may be more convenient when you want to trade, but it comes with risks, such as the possibility of the exchange failing and fraud.


What Is the Main Benefit of Decentralized Exchanges Over Centralized Exchanges?

The main benefit that a top decentralized exchange offers is that the users don't necessarily need to transfer their digital assets to another third party. And, this reduces the risk of the organization that primarily holds the assets getting hacked. As a result, there are higher chances of fraud, scams, online theft, and mainly, hacking. 

Blockchain Is Centralized or Decentralized? 

To answer your question of “blockchain is centralized or decentralized", both centralized and decentralized blockchains are possible. It's crucial, though, to distinguish decentralised from distributed. A blockchain is inherently distributed, but it is not inherently decentralised (multiple parties retain copies of the ledger). And, there you have your answer to blockchain is centralized or decentralized.

Are Crypto Exchanges Safe?

To answer your question of “are crypto exchange safe”, yes, they are safe. And, the most secure and legitimate way to acquire cryptocurrency is through exchanges.

Is Cryptocurrency Centralized or Decentralized?

Cryptocurrencies themselves are decentralized forms of cash that a person can normally hold. Their decentralized nature is defined by the transaction procedures that a group of anonymous actors perform worldwide. 

Is Coinbase a Centralized Exchange?

Coinbase is a centralized exchange. This means that the transactions performed are monitored and secured.

Examples of Decentralized Exchanges

Now that you've read about decentralized crypto exchanges, here is a list of the top decentralized crypto exchanges: 

  • PancakeSwap 
  • Kyber 
  • Uniswap 
  • dYdX

Examples of Centralized Exchanges 

After you've read about the types of crypto exchanges, here are the centralized crypto exchanges: 

  • Gemini 
  • Coincheck 
  • ByBit 
  • Binance 
  • Coinbase Exchange

FAQs

Is Centralized or Decentralized Crypto Better?

Due to numerous advantages it offers, decentralized crypto typically receives a greater preference than centralized crypto. As an illustration, decentralized cryptocurrency exchanges typically offer higher levels of security and protection than their centralized counterparts. In contrast, centralized cryptocurrency exchanges let a third party access the user's funds if they have the user's private key. In addition to this, there is a possibility that you will lose all of the money that you have deposited.

What Is the Largest DeFi Exchange?

So far, DeFi Swap is known as the largest DeFi exchange in the market. This is due to the features it offers, for example, token swaps, yield farming and staking etc.

What Is the Most Trusted Crypto Exchange?

Coinbase is the safest crypto exchange. 

Final Note

Although the concept of crypto arrived more than a decade ago, the industry is thriving now. And while the idea succeeds, the chances of security and control remain a topic of constant debate. This is why there are types of crypto exchanges now, centralized and decentralized, which come with their specific features. Meanwhile, after reading abot centralized vs decentralized crypto exchanges, this remains to you which one you go for. In addition, a top decentralized exchange comes with higher criteria of responsibility, security and control for your digital assets. With decentralized crypto, there is a new wave of security and trustworthiness that you can rely on while keeping digital assets. 

Furthermore, cryptocurrencies are backed by blockchain technology. While cryptos are the new name of finance, blockchain development is thriving as well. And numerous blockchain development agencies and top software development agencies are being introduced in the market. But, with the rising number of these best software development agencies, it can take a lot of work to decide the best one for your development project. To make this process hassle-free, we at Distinguished have a list of top development agencies to help you turn your project into reality. As a B2B service provider, we ensure a list of well-reviewed service providers that can responsibly help with your next development project. Head towards Distinguished and grow your business today. 


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